Kazakh sovereign bond fails to spark hoped-for corporate issuance

KazMunayGas' Astana HQ.

By Naubet Bisenov in AlmatyJanuary 31, 2017

The Kazakh government’s move to issue a Eurobond in 2014 for the first time in 14 years was hailed at the time as a positive move for the country’s corporate bond issuers, because it was hoped the sovereign would act as a benchmark for their securities. While the sovereign issue did help Kazakh corporate bonds already in circulation in London and elsewhere, its impact on new corporate bond issuance was limited due to the poor domestic and global economic climate.

The government returned to the global capital markets in October 2014 by selling $1.5bn of 10-year bonds priced to yield 4.073% and $1bn of 30-year bonds priced to 5.116% as part of its $10bn bond issuance programme. The success of this first issue in years prompted the government to go back to the bond market in July 2015, when it sold $2.5bn of 10-year debt priced to yield 5.26% and $1.5bn of 30-year bonds priced to yield 6.58%.

Bloomberg reported at the time of the first bond issue that the yield on the 30-year bonds of national oil and gas company KazMunayGas immediately fell by 0.14 percentage point to 5.92%, while the yield on its 10-year notes fell by 0.15pp to 4.56%.

Kazakhstan’s Eurobond was placed at a time when oil prices began their rapid descent from around $100 per barrel and the economies of the country’s main trading partners – China, Russia and the EU – started showing signs of weakness. This in turn affected the Kazakh economy, the growth of which fell from 4.2% in 2014 to 1.2% in 2015 and 0.4% in the first three quarters of 2016. The economic slowdown, caused by a contraction in oil output due to falling oil prices, led to the downgrade of Kazakhstan’s sovereign ratings by Standard & Poor’s from ‘BBB+’ in 2014 to ‘BBB-’ in 2016 (other international ratings agencies followed suit), leaving the country hovering just above junk status.

Despite the downgrades, the yield on the Kazakh bonds due 2024 fell as low as 3.6% in early November 2016, over 100 basis points lower than when they were issued, as global bond investors ploughed back into emerging markets in what BlackRock has dubbed the “Great Migration” in the search for higher yielding assets. bne IntelliNews calculations based on the latest prices of the Kazakh 10-year bonds on the LSE in January show that the current yields on the debt stand at 3.79% and 4.13%, still lower than at launch.

At the same time, since the market for Kazakh bonds is relatively small on a global scale, it is hard to talk about the effects of certain global events on their yields when the liquidity of these bonds is so limited, argues Akmal Nartayev, director of the consultancy services director at PwC in Almaty. “The general trend on the market of Kazakh corporate Eurobonds is set by the Kazakh sovereign bonds,” Nartayev says.bne calculations show that the yield on KazMunayGas bonds due 2021, issued with a coupon of 6.375%, had fallen to 5.07% on January 7.

Renegotiations

The launch of the Kazakh sovereign bond has also helped Kazakh corporate issuers renegotiate the conditions on notes with high coupon rates issued before the sovereign Eurobond. For example, the country’s seventh largest lender ATF Bank managed to reset the 10% coupon rate on its perpetual bonds issued in December 2012 at six-month Libor + 7.33% from November, which means the current coupon rate is now at 8.584%. The country’s largest but troubled lender Kazkommertsbank managed to do the same with its 9.2% perpetual bonds issued in November 2005, resetting the rate at three-month Libor + 6.1905% from November 2015 (the current rate is 7.077%).

In 2015, KazMunayGas, burdened by costly debt and feeling the pinch from low oil prices, launched a campaign to offer $3.4bn in cash to buy out some of its notes – $2bn 2043s with a yield of 5.75%, $1bn of 6% 2044s, $1bn of 4.4% 2023s, $500mn of 4.875% 2025s, $1.5bn of 7.00% 2020s and $1.25bn of 6.375% 2021s. It offered to buy notes at 88.5% to 10.75% of the nominal value of notes for November 19 and at 85.4% to 104.75% of the nominal value after December 4.

“The situation around Kazakh Eurobonds could be described as complicated, because after a switch to a free-floating exchange rate that depreciated the value of the tenge the costs of servicing debt in foreign currency has increased,” Stanislav Chuyev, debt analyst at the Almaty-based investment bank Halyk Finance, tells bne IntelliNews.

In response to falling oil prices and the rapidly weakening currency of the country’s main trading partner Russia, the Kazakh authorities abandoned a policy to maintain the tenge’s exchange rate within a trading corridor and allowed the national currency to float freely in August 2015. As a result, the tenge’s value dropped from about KZT188 to the dollar in August 2015 to a historical low of KZT384 in January 2016, but has since strengthened to about KZT332 to the dollar.

Even though KazMunayGas earns hard currency by exporting its oil, the move to buy out its Eurobonds was announced after the company secured $4.7bn for half of its 16.81% stake in the embattled giant offshore Kashagan field, which it sold to its parent Samruk-Kazyna sovereign wealth fund.

Yet despite the return of the sovereign to the international markets and the help this has afforded the corporate bonds already out there and their issuers, Kazakh companies have not rushed to raise debt, because the economic conditions in Kazakhstan and elsewhere in the region continued to deteriorate.

Since the launch of the sovereign issue in 2014, just three Kazakh companies raised debt in the immediate aftermath: KazMunayGas issued $500mn of 10-year notes with a coupon of 4.875% and $500mn of 30-year debt with a coupon of 6% on the LSE; Forte Bank issued $236.57mn of 10-year notes with a coupon of 11.75% on the Luxembourg Bourse; and Eurasian Bank raised $500mn of 10-year debt with a coupon of 7.5% on the Kazakhstan Stock Exchange.

“Prospects for issuing new debt fully depends on the situation in commodities markets – the current projects of [extractive] companies have been funded sufficiently at the moment and in case of need the state has offered aid, but new major projects will be subject to pressure from low prices of oil, metals and so on,” Chuyev of Halyk Finance concludes.

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